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Employment Commentary for July 2018

Posted August 1st, 2018

By Steven R. Drexel, President and CEO of the Cornerstone Staffing Solutions, Inc. family of companies

As an Economist and seasoned staffing industry professional, I’m regularly asked to participate in several monthly surveys and discussions that predict key elements of the Bureau of Labor Statistics’ (“BLS”) press release describing The Employment Situation. The next release revealing July’s statistics will be out on Friday, August 3rd, (typically the first Friday of each month reporting on the previous month’s activity).

The BLS offers many statistics covering weekly, monthly, quarterly, and yearly data and comparisons. Insofar as I dive deep into the data (national, industry and company), this commentary shares my thoughts and observations directly related to predicting how June will perform compared to the recent past. Our stakeholders and other interested parties may find the following remarks helpful in assisting with business strategies and objectives for the near term.

July’s Expected Employment Highlights

The recently released estimate for Gross Domestic Product (GPD) during the second quarter of 2018 was a strong 4.1 percent. This was consistent with the last three monthly employment reports which posted net job growth at a robust 211,000 new positions. Moreover, the unemployment rate is quite low and wage growth, as well as general inflation, is increasing but at a muted rate. Objectively, these are very good economic conditions. Analysts will be interested to see if the July Employment Situation Report, the first report that covers the third quarter, suggests that the good times will continue. The sheer momentum is certainly positive and there are tax cuts and increased government spending providing stimulus. The short-term headwinds, which may affect the positive momentum, are an increasingly tight labor market and uncertainty regarding our national trade policy.

The headline net job growth number during July should come in with another strong 205,000 positions. This would be roughly consistent with June’s growth as well as the second quarter average rate of change. This pattern of job growth confirms a healthy labor market consistent with the broader accelerating, albeit aging, economic expansion.

Another metric of interest but subject to less month-to-month variation is the unemployment rate. I expect the unemployment rate to decline by one click to 3.9 percent during July. This would keep the unemployment rate in the range it has been hovering around for the last nine months. It is not surprising that after 93 months of employment growth the unemployment rate is quite low. It is encouraging to note the rate has been relatively stable at this level for an extended period suggesting that the labor force is keeping up with demand rather than running dry or overheating.

Finally, the change in average hourly earnings has become a ‘headline number of interest’ because it has a big influence on general inflation and provides further insight into the availability of labor needed to sustain the expansion. I expect that the change in average hourly earnings will move up to 2.8 percent during July. This would be consistent with gradual increasing inflation and a gradually tightening labor market.

The Employment Situation Report due out Friday is always a market mover. This month the key question is, can the good times last?

Initial unemployment claims stabilized during July, remaining at or near historically low rates. Continuing unemployment claims increased during July as compared to June suggesting that the unemployed had a bit of difficulty finding jobs during July;

The Conference Board’s Consumer Confidence Index improved during July while the differential between “jobs plentiful” versus “jobs hard to get” also increased to a remarkably impressive 43.1 percent;

The National Federation of Independent Business’ Small Business Survey indicated that a net 20 percent of their members have plans to increase employment up from 18 percent during the previous month;

The California Manufacturing Survey published by Chapman University indicated that their employment index increased from 60.3 during the second quarter to 61.6 during the third quarter suggesting that employment will increase;

Federal Reserve Bank Manufacturing Surveys published by the Dallas, Kansas City, Richmond and New York districts reported improving or otherwise positive employment conditions during July; and

The American Staffing Association’s Staffing Index improved during July compared to June continuing a six-month positive trend.

Additionally, the private surveys that I participate in report continuing strength in the labor market with stronger demand and higher wages.

Federal Reserve Bank Manufacturing Survey published by the Philadelphia district reported declining employment conditions during July; and

The Wall Street Journal Forecasting Survey for July predicted a rate of employment growth at 188,000 positions which are softer than what was reported during June and below longer-term trends.

Expectations for the remainder of 2018

The second quarter was strong with GDP growing at 4.1 percent, the fastest rate since early 2014, and likewise, employment grew at an impressive and accelerating rate. Moreover, S&P 500 corporate earnings appear to be up 25 percent year over year during the second quarter. The economy is still benefiting from tax cuts and increased government spending so there is plenty of momentum and fiscal stimulus pushing continued growth forward through the end of 2018 and likely the rest of the decade. Emerging but not yet critical headwinds include rising interest rates, intensifying labor shortages and international trade uncertainties. Moreover, only about 15 percent of the recent economic releases have fallen short of expectations.

Labor shortages seem to be the dog that barks but never bites. True, employment has been growing for a record seven years and nine months and the unemployment rate is quite low. Further, every anecdotal survey including the well documented Federal Reserve Bank’s Beige Book reports that employers are struggling to fill open positions. So there are plenty of reasons to believe that the labor force could be the constraining factor. And yet, contraindications include the absence of rapidly growing wages, lower than expected labor force participation and employment to population ratios, even among prime-aged workers, and still elongated average periods of unemployment suggest that the labor market is not yet tapped out.

Consumers enjoy more job opportunities, improving hourly wage rates, lower federal tax rates and better home prices. Businesses remain the beneficiaries of lower marginal tax rates, a business-friendly regulatory posture, and improving earnings. On balance, through the rest of the decade, the positive factors and sheer momentum win-out. Over the longer-term, ballooning fiscal deficits, foreign trade tension and the distorted income distribution pose some potentially serious political and policy challenges.

Expect job growth during 2018 to remain strong while the unemployment rate drifts down closer to 3.7 percent by year-end. The near-term risk of recession remains low given the absence of any signs of critical imbalances or a looming financial bubble. Make hay while the sun shines and we expect sunshine for a few more years.

I invite you to share this commentary with your colleagues and professional network. Please call me to discuss further or ask any questions.

More About Cornerstone Staffing

Cornerstone Staffing Solutions is among the largest staffing firms in America and received Inavero’s Best of Staffing® Client Award in 2016, 2017 and 2018. Since 2003, Cornerstone has grown from a neighborhood staffing provider to a national firm that employs thousands of people at hundreds of companies from coast to coast. The Cornerstone family of companies also includes Dallas, Texas-based Rightstone (www.rightstone.com), and Chicago, Illinois-based Arlington Resources, Inc. (www.arlingtonresources.com) and Casey Accounting & Finance Resources (www.caseyresources.com). Providing candidate searching and job placement for administrative, industrial, technical, sales and transportation positions, Cornerstone truly is where talent and jobs meet.